– By Greg Budworth –

HOUSING – 3 March 2010 – Superannuation funds in Singapore, Canada, Europe and North America are partly channelled into building the economy of the future. Australian super funds could do the same. And they could start with one of the most critical elements  in the national infrastructure, housing, argues Greg Budworth, chief executive officer of Compass Housing Services Co Ltd.

[See also an article by Marcus Spiller posted in TFE]

The level of homelessness in Australia is quantifiable evidence of “market failure”’ (Boyes, 2004) – an economics term used to define the failure of the free-market system to produce an efficient outcome. Government’s intervene to adjust market failures if it is in the public interest and have a range of intervention options but are not considering all the options. Only through more private sector investment in Australian housing will we make a dent in the huge and rowing root cause of the problem – lack of housing supply. Requiring the cashed up Superannuation sector to invest some of its members funds into Australian housing is an option that needs to be seriously debated.

Like most industrialised countries, Australia has a mixed economy. It leans heavily on the free market system (an allocation of resources based on demand, supply and price) but is governed, regulated and moderated at times by direct Government intervention.

Homelessness represents a market failure because it is significantly affected by the lack of availability of houses to rent or buy at an affordable price by a growing population. Demand is there and there are capital gains and tax concessions available to developers at a lower risk, yet new supply provision is inadequately responsive.

Various reasons are put forward for this failure such as a lack of adequate land release and lack of adequate funding pipeline but in the end is it a market failure. Governments do intervene and thankfully are doing so. Tax concessions, first home buyer’s grants, Commonwealth Rent Assistance, incentive schemes (National Rental Affordability Scheme [NRAS], Social Housing Growth Fund Scheme) and density bonus options all aim to but will not fully address the gap in housing supply. Under a market system, when demand is greater than supply, rental prices rise. It is called the Law of Demand.

That might seem fair enough when we are dealing with luxury goods. The price rises we buy less or look for a suitable substitute. For luxury goods, demand is elastic as people can choose to buy less or more and are very sensitive to price changes. Unfortunately, in relation to housing, overall demand is inelastic. It is not a luxury; it is a necessity, akin to food.

Some people can opt for cheaper accommodation but when the supply of housing is so far below demand, all the cheaper accommodation options are filled, subsidised housing is filled, crisis accommodation is filled and many people sleep in their friends and/or relatives houses, their garages, in cars, in trains, under bridges and in doorways. According to the National Housing Supply Council report on the 2006 Australian Census results, those sleeping with other households or sleeping rough were 63,900 people.

Too few affordable purchasable properties means more affluent households stay in the rental market longer and most of that cohort can afford rising rent charges. Homelessness is partly the result of the domino effect. Less affluent renters have little alternative but to stay in private rental and pay rent at housing stress levels. Those with less money seek for relief to their housing stress through subsidised housing – affordable or social – and those that are currently homeless simply find it harder to find a place at all – even social housing.

This is what we are experiencing in the lucky country. Thankfully our governments have major aspirational reduction targets – general homelessness to be reduced by 7 per cent, rough sleepers by 25 per cent and Aboriginal homelessness by 33.3 per cent by 2013 (NSW Gov. 2009).

More housing will be needed to achieve these targets. The concept that “houselessness” contributes to homelessness seems obvious, however, it is the “elephant in the room” that everyone is trying hard not to notice as room redecorating options are discussed. There is no doubt that some homelessness is a result of the personal health needs, lifestyle choices or blatant discrimination against some of the persons or households experiencing homelessness and better coordination and targeting of support services may assist, but the problem requires far more than integrating support agencies (good idea anyway), running homelessness promotional campaigns to property agents (like they didn’t know), or offering risk mitigating products to landlords and agents (good idea in normal times). The homeless need homes.

An SGS Economics and Planning Report of July 2009 “A Vision and Plan for Social Housing in Australia” prepared for PowerHousing Australia states:

“With generally declining investment since the mid 70’s, social housing currently accounts for barely 5 per cent of all occupied private dwellings. This falls at least 260,000 units short of requirements to house the most needy (for example, homeless people, those living in caravans and improvised dwellings, and lower income renters in severe stress), let alone provide opportunities for key workers and other moderate income households looking to gain a foothold in jobs rich areas.”

The report draws on data produced by the National Housing Supply Council 2008 Report, which includes figures for households from the 2006 Census. It found:

  • 8800 households are sleeping rough
  • 35,000 householders are sleeping with other households
  • 12,500 households are marginally housed (e.g. caravan parks)
  • 495,300 households have very low to low incomes and are in housing stress – of these 156,000 households pay more than 50 per cent of their income in rent.

(SGS, 2009, pp 8-15)

On a brighter note, the 2007-8 Global Financial Crisis and the responsive Commonwealth Government’s Nation Building and Economic Stimulus Program  aimed to produce a further 20,000 social dwellings across the country, although the funding has since been discounted.

This burst of activity, aimed primarily at economic stimulation, will increase the subsidised housing stock and by using community housing leveraging abilities, those assets will be “put to work” producing more dwellings than could otherwise be developed by public housing authorities.

However, the circa 20,000, is still less then the 23,134 social housing dwellings that were sold off between 1996 and 2006 (Jacobs, 2010) to, among other things, aid financing the state public housing authorities during the lean years of Commonwealth funding.

However, as beneficial as NBESP will be, private investment has to come into the NRAS or even residential property per se so that supply will be increased. Only then will we see a reversing of the domino effect and homeless people, some with support assistance, will again have some availability of housing choices in the market. Certainly this is for the public good in Australia.

The SGS report considers the minimum target to be a supply of 260,000 dwellings. The costs to produce this number of dwellings could be around $80 billion and that is just to catch up.

Who can fund this?

Perhaps superannuation funds! They currently have assets of over $1.07 trillion. Of this figure $332.3 billion are self-managed funds and $613.9 billion are held by Australian Prudential Regulatory Authority superannuation entities and $127.2 billion in exempt public sector schemes and other holdings. With each employer legally obliged to contribute a minimum of 9 per cent of an employee’s salary (there is talk of raising this amount), there is plenty of money pouring into these funds each year.

Where does this money get invested? The superannuation trustees are legally obliged to have an investment strategy that takes into account diversification, liquidity and the balance of risk and return in the best interest of the members [Superannuation Industry (Supervision) Act 1993]. This has meant very little is invested in Australian residential property, and to my knowledge, none has been invested in subsidised housing schemes to any significant degree.

Perhaps, like me, you think mandating super funds to invest some of the money that the community is forced (for good reason) to give them to steward for the public good, even ethical investments is a sensible approach.

The Federal Government disagrees, preferring the softer approach of offering incentives like NRAS to attract their interest. This has been made quite clear in the debate about using super funds to fund Australia’s infrastructure needs. The Government’s answer is that it is inappropriate to dictate how the funds invest their money so as to preserve their freedom in the free market.

My problem with this is that it has taken market intervention by Government to create the majority of super funds’ assets, most of the wealth wasn’t created by the free market and further government intervention and cost to entice them into investment areas for the public good. Why not just intervene a little into the direction of investment into some (perhaps 5 per cent) of the super funds wealth for all of our benefit? Legislative intervention occurs in other industries and in this industry in other countries. It’s worthy of debate at least.

Interestingly, an Ernst and Young report The Trillion Dollar Question – Can superannuation boost investment in Australia’s infrastructure? says, “…at a philosophical level, shouldn’t the nation’s savings be channelled into building the economy of the future? This has been a long-term strategy in Singapore and Canada and now European and North American pension funds are increasingly following a similar patter. These countries are discovering that, if the private sector finances projects that would other wise be funded directly by government, this releases government revenue for tother spending priorities.”

Although this report is focussed on infrastructure investment, the same follows for any investment. If the market can achieve it, it leaves government funding for other priority areas and other countries funds are used to address needs in their own countries.

I have on good authority that some small funds may be a part of the NRAS 3 and that might hopefully attract the bigger players over time, as the risk, return and liquidity correlations of the asset class becomes more certain. Still, the concept of effectively paying super funds to invest in Australian residential property because otherwise they wouldn’t is still worth debating and discussing. The SGS forecast over 20 years is a shortfall of housing just under half a million dwellings. NRAS is unlikely to make a big dent in this need.

We need quantum sums available to invest in residential property in Australia to reverse the domino effect. We need to bridge the gap between super funds sending much of their funds offshore and the needs of this community, which is made up of the members they serve. It seems that even the benefit of “job creation”, something that would certainly generate additional wage-earners and super-members’ income, is not a part of the long term strategy considerations of the super trustees (Ernst & Young, 2009, p 5) and, other than possibly at a personal level, there is no consideration for homelessness or social housing.

Legislation could easily be drafted to support this public interest in the same way it was used to establish the current super industry. Leaving the superannuation funds (and other institutional investors) to direct investment according to the market system contributed to the global financial crisis, and didn’t that have something to do with dodgy “no doc” mortgages over residential property in the United States? Why was this seemingly good investment for so many over residential property options in Australia?

Like most people, I have family who are on the verge of retirement who lost quite a lot in the financial crisis. I asked one of them, a male aged 63, if he would have liked to put his money in safer investments even for a lower return. He wished he’d been of a mind or able to change his own investment strategy with his super fund or pulled it out and managed it himself. Some super funds do allow members some election of the class of assets they invest in. My super fund has a class called “Property” but very little of it goes to residential property in Australia. Likely the figure is near zero.

This is another avenue – grassroots members demanding their super funds direct investment towards Australian residential property or, joining the increasing numbers who are starting Self Managed Superannuation Funds and investing in residential or social housing schemes. Interestingly, SMSF now hold approximately a third of the super fund wealth, a figure that is increasing each year.

If we are to truly tackle homelessness and housing affordability we must look beyond current measures. Australians need to have a serious debate around the utilisation of superannuation funds to contribute to alleviating the gross market failure in the Australian residential property sector as well as the role of the community sector in influencing the financial sector towards appropriate use of some of Australia’s capital for Australian needs.

References:

Australian Prudential Regulation Authority (2009) Annual Report, refer to  www.apra.gov.au Attorney-General’s Department, Barton ACT

Beeferman, L. (2008) Pension Fund Investment in Infrastructure – A resource paper. Capital Matters No. 3, December 2008. Harvard Law School.

Boyes, W. (2004), ‘The New Managerial Economics’, Houghton Mifflin, Boston, pp.   26-51

Ernst & Young (2009) ‘The trillion dollar question – can superannuation boost  investment in Australia’s infrastructure? Ernst & Young Australia, File  AUNZ00000073, pp3-10.

Jacobs, K. Atkinson, R. Spinney, A. Colic-Peisker, V. Berry, M & Dalton, T. (2010)  ‘What future for public housing? A critical analysis’ Australian Housing and  Urban Research Institute, Southern Research Centre, p. 31.

Housing NSW (2009) Regional Homelessness Action Plans 2010-2014, Planning  Framework, December 2009. p 4.

SGS Economics and Planning Pty Ltd (2009) ‘A Vision and Plan for Social Housing  in Australia, PowerHousing Australia, July, pp

Greg Budworth is in his sixth year as the chief executive officer of Compass Housing Services Co Ltd, the largest regionally based community housing provider in Australia.  He is currently a director of the NSW Federation of Housing, PowerHousing Australia and Families InSight and has served on several boards and committees for SAAP funded organisations over 20 years. Greg has a Masters Degree in Business and various tertiary qualifications in Business and Project Management.